HDFC Standard Life Insurance Company Ltd.

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1 IPO NOTE SUBSCRIBE 6 TH NOVEMBER, 2017 HDFC Standard Life Company Ltd. Nifty 10,453 Sensex 33,686 Issue Details Offer Price Band ` Face Value 10 Shares Offered (in mn) HDFC Ltd. Shareholders Reservation (in mn) 29.9 HDFC Life Employee Reservation (in mn) 0.8 HDFC Ltd. Employee Reservation (in mn) 2.1 Net Issue (in mn) Issue Size (in Bn) Type Offer for Sale Listing (Stock Exchange) NSE, BSE Offer Open Date 7 v 2017 Offer Close Date 9 v 2017 QIB Allocation (of Net) 50.0% NIB Allocation (of Net) 15.0% Retail Allocation (of Net) 35.0% Pre Issue Equity Shares (mn) Post Issue Equity Shares (mn) Bid Lot 50 Scrip Estimates Market Cap (`Bn) Embedded Value September-17 (`Bn) BV Sept-17 (`Bn) 44.6 P/E.V.(x) P/B(x) Shareholding Pattern (%) Pre Post Offer Offer Promoters 95.96% 81.04% - HDFC Ltd % 51.69% - Standard Life Mauritius 34.75% 29.35% Public & Others 4.04% 18.96% Investors should read the risk factors and more detailed information in the Prospectus and the application form before investing in the issue. (` mn) Financials FY15 FY16 FY17 Net premiums earned 147, , ,749 Growth 23% 10% 19% PAT 7,855 8,168 8,869 PAT (%) ROE (%) Source: RHP & Way2Wealth Inst. Equity Chintan Gupta Tel: chintangupta@way2wealth.com Company Background HDFC Standard Life Company Ltd. (HSLIC) was established in 2000 as a joint venture between HDFC Ltd. and Standard Life Aberdeen plc (one of world s largest investment companies), initially through its wholly owned subsidiary The Standard Life Assurance Company and now through its wholly owned subsidiary Standard Life Mauritius. HSLIC was one of the most profitable life insurers, based on Value of New Business (VNB) margin among the top five private life insurers in India in FY16 and FY17, according to CRISIL. Its total New Business Premium for FY15, FY16 and FY17 was `54,921mn, `64,872mn and `86,964mn. Between FY15 and FY17, its annualized premium equivalent grew by a CAGR of 14.5%. Objects Of The Issue The objects of the offer are to achieve the benefit of listing the Equity Shares on the Stock Exchanges and to carry out the sale of offered shares by the Promoter Selling Shareholders. Investment Rationale Strong financial performance defined by consistent and profitable growth HSLIC s flexibility and ability to adapt to changes in the Indian life insurance industry has allowed its business to grow and profitability to improve. Between FY15 and FY17, its overall total premium grew at a CAGR of ~14% to `194.45bn in FY17, driven by a CAGR of 12.6%, 43.6% and 7.3% in individual new business premium, group new business premiums and renewal premiums respectively. In addition, HSLIC improved its VNB margin from 18.5% in FY15 to 22% in FY17 by improving cost efficiencies, increasing persistency ratios and selling a balanced product mix. The constant increase in VNB reflects its focus on profitable growth. HSLIC has a healthy balance sheet and delivered ROE of 25.6%, RoIC of 40.7% and Operating Return on Embedded Value of 21.7% during FY17. As of September 30, 2017, it had a solvency ratio of 2 as against the minimum 1.5 required under IRDAI regulations. HSLIC is also sufficiently capitalised and has not raised any capital during the last six years (except through ESOPS), while paying dividends totalling `7.6bn between FY14 and FY17. Growing and profitable multi-channel distribution footprint HSLIC offers individual and group customers access to its products through a diversified distribution network, which comprises four distribution channels, namely bancassurance, individual agents, direct, and brokers and others. Bancassurance remains the most significant distribution channel, generating ~50% of total new business premiums. HSLIC has 125 bancassurance partners, which include the likes of Bajaj Finance, RBL Bank, Saraswat Bank, IDFC Bank, PNB Housing Finance apart from HDFC and HDFC Bank. Individual agents contribute 7.5% of its total new business premium. As of September 30, 2017, HSLIC had 66,372 individual agents and each individual agent generated an average `119,363/- in terms of new business premium. Direct sales channel and brokers and other distribution channel generate 37.5% and 2.3% of total new business premium respectively. Focus on customer centricity HSLIC s commitment to providing a differentiated and superior customer service experience has resulted in long term profitable growth, as reflected in consistent increase in Embedded Value from `88,882mn in FY15 to `124,705mn in FY17, at a CAGR of 18%. HSLIC s commitment to better customer service experience is reflected in the fact that 99% of customer complaints were resolved with 15 days turnaround time as prescribed by IRDAI. Also, the number of customer complaints have come down from 498 per 10,000 new policies in FY13 to 81 in FY17. The efficiency of claims settlement has improved from FY15 to FY17, with average turnaround time for claims settlement decreasing from 10 days in FY15 to 5 days in FY17. HSLIC had individual claims settlement ratio of 97.6% and group claims settlement ratio of 99.6% for FY17. Its overall claims settlement ratio of 99.1% for Way2Wealth Brokers Pvt. Ltd. (CIN U67120KA2000PTC027628) SEBI Rgn.. : INH

2 FY17 is among the best in the industry. HSLIC s continued efforts to focus on improving the quality of new business, focus on needs-based selling, strong commitment to customer service has resulted in overall improvement in persistency ratio, 13 th month persistency from 73.3% in FY15 to 80.9% in FY17 and 61 st month persistency ratio from 39.8% in FY15 to 56.8% in FY17. Leading digital platform HSLIC has undertaken several initiatives and developed a mobility platform to streamline and digitise customer on-boarding and policy issuance processes, with the aim of making such processes convenient and simple. During FY17, 48% of new applications were sourced through mobile devices. HSLIC s annualized premium equivalent earned through online channels increased at a CAGR of ~28% between FY15 and FY17. Strong parentage and a trusted brand HDFC Standard Life Company Ltd. (HSLIC) was established in 2000 as a joint venture between HDFC Ltd. and Standard Life Aberdeen plc (one of world s largest investment companies), initially through its wholly owned subsidiary The Standard Life Assurance Company and now through its wholly owned subsidiary Standard Life Mauritius. Over the years, HDFC group has emerged as a recognised financial services conglomerate. HDFC has also been declared as one of the most valuable brands in India, according to the BrandZ Top 50 Most Valuable Indian Brands list in Independent and experienced leadership team HSLIC has an independent and experienced leadership team with capabilities and know-how across the banking, financial services and insurance sectors. As at September 30, 2017, its KMP s have an average of over 10 years of experience in the financial services sector. Company CMP /I.P.( `) Peer Comparison and Relative Valuation Embedded NBP Mcap Value (E.V.) CAGR (`Bn) (`Bn) (FY12-17) (Sept-17) Renewal Premium Growth (FY12-17) 13/37/61 Month Persistency Ratio (%) ICICI Prudential Life % 8.6% 85.7/66.8/56.2 HDFC Standard Life % 11.0% 80.9/63.9/56.8 SBI Life % 10.5% 81.1/67.4/67.2 Company NBM AUM CAGR (FY12-17) Death Claims Settlement Ratio Claim Repudiatio n Ratio Avg. ROE (FY15-17) P/E.V. (Sep- 17) P/B (Sep- 17) ICICI Prudential Life 10.1% 11.9% 97.2% 2.4% 31.2% HDFC Standard Life 21.6% 23.3% 99.2% 0.7% 29.4% SBI Life 15.4% 16.0% 98.0% 1.6% 20.1% (Source: RHP, Company Filings, Way2Wealth Inst. Equity) Risk If actual claims experience and other parameters are different from the assumptions used in pricing the products, and setting reserves for its products, it could have an adverse impact on HSLIC s profitability. Termination or adverse change in bancassurance arrangements, individual agents or other distribution intermediaries, or a decline in performance standards of bancassurance partners, agents or other distribution network may have an adverse impact on the business of HSLIC. Changes in regulation and compliance requirements could have a material adverse impact on HSLIC s business. 2 P age

3 Valuation And Investment Argument HSLIC was one of the most profitable life insurers, based on Value of New Business Margin, among the top five private life insurers in India in FY16 and FY17, according to CRISIL. HSLIC has been consistently gaining market share in terms of total new business premium, from 15.8% in FY15 to 17.2% in FY17. With Life penetration in India at a meagre 2.6% in 2016 as against the global average of 3.5% in 2016 (comparable Asian counterparts of Thailand, Singapore and South Korea have penetration levels of 3.7%, 5.5% and 7.4% respectively), we believe HSLIC is well poised to capture the huge opportunity in the Life sector in India. At the price band of ` the issue is priced at ~ x its Sep-17 Embedded Value of `69.7 per share. We believe the premium valuations compared to ICICI Prudential Life and SBI Life are justified due to comparatively higher NBP growth, best in class New Business Margin (NBM) of 22%, consistently high return ratios over the years, higher renewal premium growth over five years (FY12-FY17), lower mis-selling, better death-claims settlement ratio and lowest claims repudiation ratio. We advise investors with a long-term investment horizon to SUBSCRIBE to the issue. 3 P age

4 Financials HDFC Standard Life Company Ltd Policyholders Account FY15 FY16 FY17 Premium Income 148, , ,455 Reinsurance ceded (Net) (675) (1,342) (1,706) Premiums earned (net) 147, , ,749 Income from Investments 122,493 17, ,406 Other Income ,389 Total Income (A) 270, , ,544 YoY (%) 56.7% -33.3% 69.1% Commission 6,235 7,019 7,920 Op. Expenses related to insurance business 14,888 18,718 23,853 Provision for Tax 1,193 1,746 1,520 Provision (Other than Taxation) (25) Service Tax on charges 1,532 1,854 2,161 Total (B) 23,823 29,369 35,517 Benefits paid (Net) 81,624 81,769 98,422 Interim and Terminal Bonuses paid ,582 Change in valuation of liability in respect of life policies 156,525 59, ,548 Total (C) 238, , ,552 Surplus (A-B-C) 8,220 9,595 9,475 Surplus (%) 5.6% 5.9% 4.9% YoY (%) 91.3% 16.7% (1.3%) APPROPRIATIONS Transfer to Shareholders Account 6,709 7,183 7,863 Provision for lapsed policies unlikely to be revived (384) (487) - Balance being funds for future appropriations 1,896 2,900 1,613 (`mn) Shareholders Account FY15 FY16 FY17 Amount transferred from Policyholders Account 6,709 7,183 7,863 Income from Investments 2,033 1,712 2,303 Other Income Total Income (A) 8,742 9,000 10,167 YoY (%) (0.8%) 3.0% 13.0% Op. Expenses other than those directly related to insurance business Contribution to Policyholders Account Provision (Other than Taxation) (1) 33 (44) Total (B) ,078 Profit/(Loss) before Tax (A-B) 8,046 8,334 9,089 Provision for Tax Profit/(Loss) after Tax (A-B) 7,855 8,168 8,869 YoY (%) 8.3% 4.0% 8.6% 4 P age

5 Balance Sheet FY15 FY16 FY17 (` mn) Shareholder s Funds Equity capital 19,949 19,949 19,949 Reserves 5,484 11,494 17,955 Credit/(Debit) Fair Value Change Account (20) (412) 323 Sub-total- (Shareholders Funds)---(A) 25,413 31,035 38,263 Policyholder s Funds Credit Fair Value Change Account ,981 Policy Liabilities 192, , ,827 Provision for Linked Liabilities (i) 334, , ,290 Fair Value Change(ii) 86,658 41,938 77,775 Funds for Discontinued Policies (iii) 27,802 29,732 29,940 Total Provision for Linked& Discontinued Policyholders Liabilities (i+ii+iii) 449, , ,005 Sub-total- (Policyholders Funds)---(C) 642, ,813 8,65,813 Funds for Future Appropriation---(D) 4,642 7,055 8,668 Total Liabilities (A+B+C+D) 672, , ,744 Investments- Shareholders 21,947 25,538 32,314 Investments- Policyholders 199, , ,915 Assets held to cover Linked Liabilities 449, , ,005 Loans 1, Fixed Assets 3,525 3,474 3,535 n-current Assets 675, , ,248 Cash and Bank Balances 5,725 7,274 7,974 Advances and other assets 12,344 12,329 21,744 Current assets 18,069 19,603 29,718 Current liabilities and Provisions 20,423 25,541 38,222 Net current assets (2,354) (5,939) (8,504) Total Assets 672, , ,744 5 P age

6 Team Analyst Designation Sector Telephone Alok Ranjan Head Research Jaisheel Garg AVP Power, Power Equipment, Coal Mining Shivani V. Vishwanathan AVP FMCG, Consumer Durables Chintan Gupta Research Associate Ashwini Sonawane Research Associate Institutions Designation Telephone Kaushal Jaini Vice President BhavikaRavasia Senior Manager Mitul Doshi Institutional Sales P age

7 Disclaimer Analyst Certification: I, Chintan Gupta, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Way2Wealth Brokers Private Limited, hereinafter referred to as Way2Wealth) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. It is confirmed that Chintan Gupta, the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months. 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Disclosure of Interest Statement in HDFC Standard Life Company Ltd. as on vember 6, 2017 Name of the Security Name of the analyst Analysts ownership of any stock related to the information contained Financial Interest Analyst : Analyst s Relative : Yes / Analyst s Associate/Firm : Yes/ Conflict of Interest Receipt of Compensation Way2Wealth ownership of any stock related to the information contained Broking relationship with company covered Investment Banking relationship with company covered HDFC Standard Life Company Ltd. Chintan Gupta This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 7 P age